Solving Economics of Last-Mile Through Micro-Fulfillment Centers

Omnichannel retailers are looking to reinvent logistics strategies to solve economics of last-mile delivery through micro-fulfillment centers. 

multiple brown boxes on conveyor belts

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As consumer expectations around convenience continue to rise and competition intensifies with more ecommerce retailers pursuing grocery ambitions, omnichannel retailers are looking to reinvent logistics strategies to solve economics of last-mile delivery. In the last months, several leading grocers including Walmart, Ahold Delhaize, Albertsons and Woolworths have been partnering with technology start-ups to explore micro-fulfillment as a faster and more cost-effective solution to grocery ecommerce.  

  In a nutshell, micro-fulfillment centers (MFCs) represent a middle ground between two models that have so far dominated e-grocery. It combines the speed of local delivery associated with in-store order picking with the efficiencies of robotics fulfillment from large automated facilities. 

Micro-Fulfillment Center, step by step overview inside a warehouse with totes, robots and pallets

First and foremost, MFCs employ automation and robotics to address a key fundamental cost challenge associated with online order fulfillment – order picking. Automation of the process of retrieving products from the storage area significantly improves efficiency and accuracy, while also minimizing associated labor costs.  

As MFCs operate in structures of compact, vertical rows of storage space, they are small enough to be installed at the back of a store, utilizing excess space and creating an operational advantage over online retailers using central fulfillment centers. Alternatively, they can operate out of a separate location – for example, abundant urban real estate, often inexpensive and left empty by the structural change in the industry.  

Finally, its smaller size allows MFCs to be deployed in urban space as opposed to the out-of-town location of a central fulfillment center. With this, retailers cut the average distance between MFC and customer to a viable minimum, allowing for both in-store pickup and rapid home delivery. At the same time, high-density urban locations also provide a catchment area that maximizes the number of addressable households. Amid the current global health crisis, MFCs are incredibly valuable in fulfilling online grocery orders and may see an expansion as retailers look to keep up with demand. 

Comparison chart of order fulfillment models such as Automated FC, In-store and Automated MFC

In addition, they are less investment-intensive and fast to implement, facilitating planning and rollout. The decision to opt for MFC, however, will depend on the retailer, as order frequency, demand for ultra-fast fulfillment, store portfolio and store density all differ by category, and should be made on a case by case and geographical basis. For example, Kroger has opted to partner with Ocado on centralized automated fulfillment centers in the North-Western US, where the retailer’s store network is less dense and micro-fulfillment wouldn’t cover the consumer base.  

Recommendations for brands  

Although there are only a few micro-fulfillment centers in operation today, the technology has high implementation potential, especially in the grocery and health & beauty space, where demand for and the benefits of fast fulfillment are high. Technology start-ups including Takeoff and Fabric are seeing funding and trial opportunities increase and predict that hundreds will be in operation by 2021.  

We anticipate more retailers following suit, employing the solution as part of their ecommerce strategy. Suppliers should start evaluating the implications of wider solution implementation and can prepare by:  

Optimize packaging: As micro-fulfillment centers will increasingly deploy automation to pick, pack and transport merchandise, brands will have to adjust product packaging in way that it can be easily identified and mechanically handled, including in small-vehicle deliveries;  

Support assortment curation: MFCs carry a limited assortment, propelling retailers to stock the most popular items in that store. Brands must support localization with curated ranges;

Accelerate manufacturing and inventory cycle: As MFCs accelerate fulfillment, brands will be required to reassess their inventory planning and distribution capabilities in anticipation of tighter time frames.  

Ensure listing: Assortment and shelf space will be challenged as retailers target range reduction. Brands should consider investing in experiential initiatives.  

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Violetta Volovich
Violetta Volovich
Associate Analyst

Violetta Volovich is an Associate Analyst for PlanetRetail RNG. Violetta monitors retail market developments across the world identifying key growth opportunities, with a particular focus on central and Eastern European markets.

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